ULIP finds a mention quite often when discussing insurance or investment. ULIPs are one of the few options bringinginvestment and life insurance together to address several needs with a single plan.
What is a ULIP?
Imagine that the premium you pay into a single plan was to fulfil your life insurance as well as investment needs, based on the one that were to come up first. Furthermore, all this was offered without you managing your investment or having to make hasty decisions in this regard.
All this, and more, is offered by ULIPs.
Short for “Unit-linked Insurance Plans”, ULIPs are life insurance plans with an investment aspect to them. The policyholder can expect a market-linked maturity return if the life assured were to survive the policy duration. On the other hand, if anything unfortunate were to happen, the nominee can claim a death benefit to ensure a secure future for themselves.
How Does a ULIP Work?
Let’s look at some of the factors of these plans that can help you understand how they work.
· Premium Allocation
When you invest in a ULIP, you are offered two key benefits – death benefit and maturity benefit. Either of these could be put to use in the future, depending on the circumstances.
The premium you pay is allocated towards both these goals, in a way that any need that may arise is fulfilled. To meet these requirements, the premium is invested in various funds, depending on your choice. The funds are managed by professional fund managers.
· Fund Options
ULIPs offer a variety of fund options, which allow you to select your preferred investment strategy based on your risk tolerance:
Equity Funds: High-risk, high-return investments, primarily in stocks.
Debt Funds: Low-risk, steady-return investments in bonds and government securities.
Balanced Funds: A combination of equity and debt to balance risk and returns.
· Switching Between Funds
One of the key benefits of a ULIP is the flexibility to switch between different fund types during the policy term. For example, if market conditions favour equities, you can shift more funds toward equity investments. Alternatively, if you seek more stability, you can switch to debt funds. ULIP policies allow a certain number of free switches per year, after which fees may apply.
· Charges Involved
While ULIPs offer significant flexibility and investment potential, they also involve several charges.
Premium Allocation Charge: A fee deducted from the premium before allocation.
Fund Management Charge: A fee for managing your investments.
Mortality Charge: It covers the cost of providing life insurance. Understanding these charges is essential to evaluating your ULIP’s performance and returns.
Why Use a ULIP Calculator?
A ULIP calculator is a crucial tool to help you estimate the returns and coverage of a ULIP before making a purchase. By inputting details such as your age, premium amount, investment tenure, and risk preference, a ULIP calculator can provide you with projected returns, helping you plan your financial goals.
Things to Know Before Buying a ULIP
Whether you are a new customer or buying another ULIP for your new needs, here are a few things you should know about these plans.
· Lock-in Period
ULIPs come with a mandatory lock-in period of five years. During this time, you cannot withdraw your funds. This ensures a disciplined approach to long-term investment but requires you to be financially prepared to leave your money untouched for at least five years. After the lock-in period, partial withdrawals are allowed, offering liquidity if needed.
· Investment Risk
Since ULIPs invest in market-linked instruments such as equities and debt, the returns are subject to market performance. Equity-based ULIPs carry higher risk, while debt-based ULIPs are relatively safer but may offer lower returns. Assess your risk appetite and choose the right fund allocation to match your financial goals.
· Charges and Fees
While ULIPs offer multiple benefits, they also come with various charges. Other than premium allocation and fund management charges, there may be policy administration fees and surrender charges if you terminate the policy early. Review the fee structure carefully to ensure the charges do not erode your returns over time.
· Tax Benefits
ULIPs provide tax benefits under the Income Tax Act, 1961. The premiums paid for a ULIP are eligible for deduction under Section 80C, subject to a maximum of ₹1.5 lakh per annum. Additionally, the maturity or death benefit received is tax-exempt under Section 10(10D), provided certain conditions are met. These tax advantages make ULIPs attractive for investors seeking both insurance and wealthcreation.
A ULIP is an innovative product combining the benefits of life insurance and investment. It offers the flexibility to choose fund options, switch between them, and potentially earn market-linked returns while ensuring financial security for your loved ones. With the right approach, a ULIP can be a valuable tool for achieving both life insurance protection and long-term financial growth.
Disclaimer: This content is part of a marketing initiative. No TNIE Group journalists were involved in the creation of this content.